arab-malaysian finance bhd v taman ihsan jaya sdn bhd & ors

Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd &Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party)

HIGH COURT (KUALA LUMPUR) — SUIT NOS D4-22A–067 OF2003, D4-22A–215 OF 2004, D4-22A–1 OF 2004, D4-22A–185 OF2005, D4-22A– 399 OF 2005, D4-22A–395 OF 2005,D4-22A–166 OF2006, D4-22A–167 OF 2006, D4-22A–178 OF 2006, D4-22A–192 OF2006, D4-22A–203 OF 2006, D4-22A–204 OF 2006

ABDUL WAHAB PATAIL J18 JULY 2008

Banking — Banks and banking business — Islamic banking — Islamicfinancing facility — Al-Bai’ Bithaman Ajil — Whether involved element notapproved in Islam — Whether riba a prohibited element in Islamic financing —Whether Al-Bai’ Bithaman Ajil transaction rendered facility contrary to theIslamic Banking Act 1983 or the Banking and Financial Institutions Act 1989

This judgment, which had arisen from the introduction of Islamic financinginto Malaysia, is a consideration of the basic principles governing Islamicfinancing and the jurisdictional limitations imposed upon the civil courts indealing with these issues because of Malaysia’s constitutional arrangements.Bank Islam Malaysia Bhd and other financiers (‘the plaintiffs’) have beendirected by the court to present their individual submissions, which involvedforeclosure and other civil remedies against various individual debtors of theplaintiff bank, collectively so that the principles governing Islamic financingfacilities could be considered more comprehensively, and with the aim ofobtaining a more consistent result. Although common law sourced civil lawand Islamic law are both protected and enabled by the Federal Constitution,limitations arise as to whether civil law and the remedies available thereincould apply to an Islamic financing facility. Although cases involving Islamicfinancing are brought in the civil courts it is not for these courts to interpretwhich mazhab in Islam is to prevail and be applied. In addition, Islamicfinancing in Malaysia is governed by the Islamic Banking Act 1983 and theBanking and Financial Institutions Act 1989 for banks licensed under therespective legislation. However these Acts do not lay down specific provisionsfor Islamic banking and financing except to say that the aims and operationsof the bank should not involve any element not approved by Islam. Theprimary element governing Islamic financing facilities is the prohibition ofriba or interest. In the cases before the court the defendants had alreadypurchased a property from a third party and had paid for part of the price.They had then approached the plaintiffs for a facility to complete their

[2008] 5 MLJ 631


(Abdul Wahab Patail J)

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purchase. The plaintiffs had required the respective defendant to sell theproperty he had bought to the plaintiff banks for that balance of the purchaseprice, according to the terms of bank’s property purchase agreement (‘PPA’).The plaintiffs then sold the property back to the respective defendants underthe bank’s property sale agreement (‘PSA’), wherein the respective defendantsagreed to pay an agreed number of monthly installments of specific sums. Assecurity the defendants were required to execute charge or assignment of theproperty to the plaintiff. The total of the agreed installments added up to thebank’s ‘selling price’, under the transaction known as a Bai-Bithaman Ajil aspractised by the plaintiffs. This gave rise to the issue as to the correctinterpretation to be given to the agreed selling price under an Al-Bai’Bithaman Ajil contract. It also became necessary to consider the function ofthe civil court when deciding on cases that involve Islamic financing.

Held, ordering a sale by public auction of the charged properties with coststo be taxed:

(1) When dealing with cases involving Islamic financing facilities, the civilcourt functions strictly as a civil court and does not become a SyariahCourt. The civil court’s function, in this regard, is to render a judiciallyconsidered decision before it according to law and not apply Islamic lawas if it were a Syariah Court. Its function is to examine the applicationof the Islamic concepts and to ensure that the transactions in the casesbefore it do not involve any element not approved in Islam (see paras8 & 31).

(2) In Islamic financing there is nothing that prohibits the giving of a loan.It is only the riba element in the loan that is prohibited. Hence, loanswithout riba ie benevolent loans or qard al-Hasan are allowed(see para 18).

(3) The term Al-Bai’ Bithaman Ajil is no more than a sale and deferredpayment of the price as agreed to between the parties. As such, theselling price is ordinarily paid upon delivery. However if the payment isto be made later, the seller is in effect extending a credit or a loan of thatselling price. At the same time it must be remembered that the deferredpayment of the selling price is a credit or a loan permissible onlybecause no riba is charged. Furthermore, the key to the argument thatthe Al-Bai’ Bithaman Ajil scheme does not involve any element notapproved by Islam is to read the PSA independently. Therefore it isessential to maintain a bona fide sale in order that the profit or sellingprice should not be an element disapproved by Islam. Even so, aninterpretation of the selling price must not be such as to impose aheavier burden than on a loan with interest (see paras 52–56).

632 [2008] 5 MLJMalayan Law Journal

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(4) The court has the authority to look beyond the words of the agreementto the actual facts of the case in order to determine the substance of thetransaction between the plaintiffs and the defendants before it draw anyconclusions on the nature of the Al-Bai’ Bithaman Ajil transactions. Itis necessary to look beyond the labels used and look at the substanceparticularly in the light of the fact that the interpretation advanced bythe plaintiffs resulted in the defendants being burdened with a debt farin excess of that if they had taken interest based on a conventional loan(see para 62).

(5) Thus when the bank became the owner of the property by a directpurchase from the vendor or by a novation from its customer, as in thepresent cases, and then sold the property to the customer, the plaintiffs’interpretation of the selling price ought to be rejected and the equitableinterpretation applied. Where the bank purchased directly from itscustomer and sold back to the customer with deferred payment at ahigher price in total, the sale was not a bona fide sale but a financingtransaction and the profit portion of such an Al-Bai Bithaman Ajiltransaction rendered the facility contrary to the Islamic Banking Act1983 or the Banking and Financial Institutions Act 1989, as the casemay be (see paras 68–69).

(6) Since the plaintiffs’ actions resulted most likely from a misapprehensionrather than intent afterthought, the plaintiffs were entitled under s 66of the Contracts Act 1950 to a return of the original facility amountthey had extended. It was equitable that the plaintiffs seek to obtain aprice as close to, if not more than, the market price as possible, andaccount for the proceeds to the respective defendants (see paras 70–71).

[Bahasa Malaysia summary

Penghakiman ini, yang timbul daripada pengenalan pembiayaan Islamdi Malaysia, merupakan pertimbangan terhadap prinsip-prinsip asas yangmentadbir pembiayaan Islam dan had-had bidang kuasa yang dikenakankepada mahkamah sivil dalam menangani isu-isu ini disebabkan olehsusunan perlembagaan Malaysia. Bank Islam Malaysia Bhd dan lain-lainpembiaya (‘plaintif-plaintif ’) telah diarahkan oleh mahkamah untukmengemukakan hujahan secara individu, yang melibatkan perampasan danremedi-remedi sivil yang lain terhadap beberapa penghutang individu kepadabank plaintif, secara bersama supaya prinsip-prinsip yang mentadbirkemudahan pembiayaan Islam boleh dipertimbangkan dengan lebihkomprehensif, dan dengan tujuan untuk mendapatkan keputusan yang lebihkonsisten. Walaupun undang-undang sivil yang didapati daripada commonlaw dan undang-undang Islam adalah kedua-duanya dilindungi dan diberikuasa oleh Perlembagaan Persekutuan, pengehadan timbul mengenai sama

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ada undang-undang sivil dan remedi-remedi yang terdapat di dalamnya bolehberaplikasi kepada kemudahan pembiayaan Islam. Walaupun kes-kes yangmelibatkan pembiayaan Islam dibawa ke mahkamah sivil ia bukan tugasmahkamah-mahkamah ini untuk mentafsir mazhab mana di dalam Islamyang lebih mengatasi dan boleh diaplikasikan. Tambahan, pembiayaan Islamdi Malaysia adalah ditadbir oleh Akta Bank Islam 1983 dan Akta Bank danInstitusi-Institusi Kewangan 1989 untuk bank-bank yang dilesenkandi bawah perundangan yang berkenaan. Walau bagaimanapun, Akta-Akta initidak menyenaraikan peruntukan-peruntukan spesifik untuk perbankan danpembiayaan Islam kecuali menyatakan bahawa tujuan dan operasi bank tidaksepatutnya melibatkan apa-apa unsur yang tidak diluluskan oleh agamaIslam. Unsur asas yang mentadbir kemudahan pembiayaan Islam adalahlarangan riba atau faedah. Di dalam kes-kes di hadapan mahkamahdefendan-defendan telah pun membeli hartanah daripada pihak ketiga dantelah membayar sebahagian harga belian. Mereka kemudian berjumpadengan plaintif-plaintif untuk suatu kemudahan untuk menyelesaikanpembelian mereka. Plaintif-plaintif telah menyuruh defendan-defendanberkenaan untuk menjual hartanah yang dibeli kepada bank-bank plaintifuntuk baki harga jualan, menurut terma-terma perjanjian pembelianhartanah bank (‘PPA’). Plaintif-plaintif kemudian menjual semula hartanahtersebut kepada defendan-defendan yang berkenaan di bawah perjanjianpenjualan hartanah bank (‘PSA’), di mana defendan-defendan masing-masingbersetuju untuk membayar ansuran bulanan untuk jumlah tertentu yangdipersetujui. Sebagai jaminan defendan-defendan diperlukan untukmenandatangani gadaian atau perletakhakkan hartanah tersebut kepadaplaintif. Jumlah keseluruhan ansuran yang dipersetujui ditambah kepada‘selling price’ bank, di bawah transaksi yang dikenali sebagai Bai BithamanAjil seperti yang diamalkan oleh plaintif-plaintif. Ini menjurus kepada isutafsiran sebenar yang perlu diberikan kepada harga jualan yang dipersetujuidi bawah kontrak Al-Bai’ Bithaman Ajil. Ia juga perlu untukmempertimbangkan fungsi mahkamah sivil apabila memutuskan kes-kesyang melibatkan pembiayaan Islam.

Diputuskan, memerintahkan jualan melalui lelongan awam untukhartanah-hartanah yang dicagarkan dengan kos dikenakan cukai:

(1) Apabila berurusan dengan kes-kes yang melibatkan kemudahanpembiayaan Islam, mahkamah sivil berfungsi secara tegas sebagaimahkamah sivil dan tidak menjadi Mahkamah Syariah. Fungsimahkamah sivil, dalam hal ini, adalah untuk memberikan keputusanyang dipertimbangkan secara kehakiman di hadapannya menurutundang-undang dan bukan mengaplikasikan undang-undang Islamseperti ia adalah Mahkamah Syariah. Fungsinya adalah untuk mengujiaplikasi konsep Islam dan untuk memastikan bahawa transaksi tersebut


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di dalam kes-kes di hadapannya tidak melibatkan apa-apa unsur yangtidak dipersetujui di dalam Islam (lihat perenggan 8 & 31).

(2) Di dalam pembiayaan Islam tidak ada apa-apa yang melarangpemberian pinjaman. Hanya unsur riba di dalam pinjaman yangdilarang. Oleh itu, pinjaman tanpa riba iaitu pinjaman kebajikan atauqard al-Hasan adalah dibenarkan (lihat perenggan 18).

(3) Terma Al-Bai’ Bithaman Ajil bukan lebih dari pembayaran jualan danditunda harga seperti yang dipersetujui di antara pihak-pihak. Oleh itu,harga jualan adalah biasanya dibayar semasa penghantaran. Walaubagaimanapun jika bayaran akan dibuat kemudian, penjual sebenarnyamembenarkan pinjaman terhadap harga jualan. Pada masa yang sama iamesti diingat bahawa bayaran tertangguh harga jualan adalah pinjamanhanya kerana riba tidak dikenakan. Tambahan, asas kepadapenghujahan bahawa skima Al-Bai’ Bithaman Ajil tidak melibatkanapa-apa unsur yang tidak dipersetujui oleh Islam adalah untukmembaca PSA secara berasingan. Oleh itu adalah penting untukmemelihara jualan bona fide supaya keuntungan atau harga jualan tidakmenjadi unsur yang tidak dipersetujui oleh Islam. Walaupun demikian,pentafsiran harga jualan tidak boleh menjadi seperti mengenakan bebanyang lebih berat daripada pinjaman dengan faedah (lihat perenggan52–56).

(4) Mahkamah mempunyai autoriti untuk mentafsir melampaui perjanjiankepada fakta sebenar kes untuk menentukan inti pati transaksi di antaraplaintif-plaintif dan defendan-defendan sebelum membuat sebarangkeputusan terhadap sifat transaksi Al-Bai’ Bithaman Ajil. Adalah perluuntuk mentafsir melampaui label yang digunakan dan melihat inti patikhususnya di atas fakta bahawa pentafsiran yang diberikan olehplaintif-plaintif menyebabkan defendan-defendan dibebankan denganhutang yang jauh melebihi jika mereka mengambil faedah berdasarkanpinjaman konvensional (lihat perenggan 62).

(5) Oleh itu apabila bank menjadi tuan punya hartanya melalui pembelianterus daripada penjual atau melalui novasi daripada pelanggannya,seperti di dalam kes-kes kini, dan kemudian menjual hartanah tersebutkepada pelanggan, tafsiran plaintif-plaintif terhadap harga jualan mestiditolak dan pentafsiran berekuiti beraplikasi. Apabila bank membeliterus daripada pelanggannya, dan menjual semula kepada pelanggantersebut dengan bayaran yang ditunda pada harga yang lebih tinggisecara keseluruhannya, jualan tersebut bukan jualan bona fide tetapitransaksi pembiayaan dan bahagian keuntungan seperti transaksiAl-Bai’ Bithaman Ajil menyebabkan kemudahan tersebut bertentangandengan Akta Bank Islam 1983 atau Akta Bank dan Institusi-InstitusiKewangan 1989, mengikut sesuatu kes (lihat perenggan 68–69).

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(6) Oleh kerana tindakan plaintif-plaintif disebabkan oleh, besarkemungkinan daripada salah faham dan bukan dengan niat yangdifikirkan kemudian, plaintif-plaintif berhak di bawah s 66 AktaKontrak 1950 kepada pemulangan kemudahan asal jumlah yangmereka telah diberikan. Adalah berekuiti bahawa plaintif-plaintifmeminta untuk mendapatkan harga yang paling hampir kepada,jikapun tidak lebih daripada, harga pasaran yang mungkin, danmenjelaskan hasil kepada defendan-defendan yang berkenaan (lihatperenggan 70–71). ]

Notes

For cases on Islamic banking, see 1 Mallal’s Digest (4th Ed, 2005 Reissue)paras 1952–1954.

Cases referred to

Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67 (folld)Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005] 5 MLJ

210 (refd)Bank Islam Malaysia Bhd v Adnan bin Omar [1994] 3 CLJ 735; [1994] 3

AMR 44 (distd)Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355

(refd)Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corp Sdn Bhd [2003] 2 MLJ

408 (folld)BI Credit & Leasing Bhd v Loo Wah Hee & Anor [2002] 1 LNS 114 (refd)Che Omar bin Che Soh v PP [1988] 2 MLJ 55 (refd)Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1998] 3 MLJ

393 (refd)Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249 (refd)Malayan Banking Bhd v PK Rajamani [1994] 2 CLJ 25 (refd)Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389

Legislation referred toBanking and Financial Institutions Act 1989Central Bank of Malaysia Act 1958Contracts Act 1950 s 66Federal Constitution art 74, Schedule 9Islamic Banking Act 1983National Land Code ss 256, 257(1)Rules of the High Court 1980 O 83 r 3, O 83 r 3(3), O 83 r 3(7)

Abdul Wahab Patail J:

[1] This court had directed counsel for the plaintiff banks and other


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financiers, as well as counsel for the defendant customers in these cases beforethe court to present their submissions together so that their collective effortscould be availed of for a more comprehensive consideration than would havebeen possible if each case had been argued and decided separately, and toobtain a more consistent result as to the basic principles concerning Islamicfinancing facilities. The resulting submissions read collectively did notdisappoint in this regard. To do justice to the collective effort requiredconsiderable time, effort and organisation.

[2] A consideration of the basic principles concerning Islamic financingmust include a consideration of the religion of Islam under the FederalConstitution and the relevant laws as to banking and finance in addition tothe relevant elements in the said religion.

FEDERAL CONSTITUTION

[3] The introduction of Islamic financing in Malaysia is complicated bythis country’s constitutional arrangements. Article 74 of the FederalConstitution of Malaysia provides that finance, including banking,moneylending, pawnbrokers, control of credit, as well as trade, commerceand industry are subject matters within the federal list, while matters relatingto the religion of Islam are within the states list. Cases involving the formerare within the jurisdiction of the civil courts, while those involving the latter,but only so far as it concerns the matters in para 1 of the states list in Schedule9, are within the jurisdiction of the Syariah Courts.

[4] This jurisdictional limitation in respect of the states and the SyariahCourts means that cases involving Islamic financing in Malaysia remainwithin the Federal legislative jurisdiction, and cases relating thereto arebrought in the civil courts. No legislation in the form of Islamic laws has beenmade for trade and financing based upon Islamic principles. The onlyprovision is that there be no element involved which is not approved by thereligion of Islam.

[5] Neither the Federal Constitution nor the Islamic Banking Act 1983 andthe Banking and Financial Institutions Act 1989 provide as to theinterpretation of which mazhab in the religion of Islam is to prevail and beapplied. The terms Islam and religion of Islam are therefore not confined toany mazhab of the religion. The Islamic financing facilities are presented asIslamic to Muslims of all mazhabs. The facilities do not say they are offeredonly to Muslims of a certain mazhab, for example Syafi’e. If a facility is to beoffered as Islamic to Muslims generally, regardless of their mazhab, then thetest to be applied by a civil court must logically be that there is no elementnot approved by the religion of Islam under the interpretation of any of the

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recognised mazhabs. That it is acceptable to one mazhab is not sufficient tosay it is acceptable in the religion of Islam when it is not accepted by the othermazhabs.

RELIGION AND LAW

[6] Complications are perceived to arise from aspects neatly described bySuriyadi J (as he then was) in Arab-Malaysian Merchant Bank Bhd v SilverConcept Sdn Bhd [2005] 5 MLJ 210 as follows:

[13] This case involves the marriage of two distinctly diverse worlds,namely the Islamic world and the common law sourced civil law, bothprotected and enabled by the Federal Constitution. The agreementshere have Islam as their foundation whilst the foreclosure proceedingscome under the civil law jurisdiction, specifically the National LandCode 1965 and the Rules of the High Court 1980.

CIVIL COURT AND ISLAMIC FINANCING CASES

[7] In a case involving a question as to the application of s 256 of theNational Land Code in an Islamic financing facility, the Court of Appeal ina brief and to the point judgment in Bank Kerjasama Rakyat Malaysia Bhd vEmcee Corp Sdn Bhd [2003] 2 MLJ 408 CA held:

The Law

As was mentioned at the beginning of this judgment the facility is an Islamicbanking facility. But that does not mean that the law applicable in this applicationis different from the law that is applicable if the facility were given underconventional banking. The charge is a charge under the National Land Code. Theremedy available and sought is a remedy provided by the National Land Code. Theprocedure is provided by the Code and the Rules of the High Court 1980. Thecourt adjudicating it is the High Court. So, it is the same law that is applicable,the same order that would be, if made, and the same principles that should beapplied in deciding the application.

The main source of the applicable law is s 256 of the National Land Code ...

[8] In dealing with cases involving Islamic financing facilities, the civilcourt functions strictly as a civil court It remains for all purposes a civil court.It does not become a Syariah Court. Nor does it proceed to apply Islamic lawaccording to the interpretations and beliefs of any particular mazhab as itmight if it were a Syariah Court. The civil court’s function is to render a


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judicially considered decision on the particular facts of the specific case beforeit according to law.

ORDERS FOR SALE

[9] No civil court of competent jurisdiction is under any circumstancesmere rubber stamp to grant any order, be it an order for sale. In applicationspursuant to s 256 of the National Land Code and made under O 83 of theRules of the High Court 1980, plaintiffs are required to set out under r 3thereof:

Order 83 Rule 3 Actions for possession or payment (O 83 r 3)

(1) The affidavit supporting the originating summons must comply withthe following.

(2) The affidavit must exhibit a true copy of the charge and the originalcharge, and in the case of a registered charge, the charge certificate mustbe produced at the hearing of the summons.

(3) If plaintiff claims delivery of possession, the affidavit must show thecircumstances under which the right to possession arises and show theamount of advance, amount of repayment, amount of instalments inarrears as at date of summons and date of affidavit, and amountremaining under the charge.

(4) If delivery of possession is sought, the affidavit must give particular ofevery person who to the best of the plaintiffs knowledge is in possessionof the charged property.

(5) If the charge creates a tenancy other than a tenancy at will between thechargor and chargee, the affidavit must show how and when thetenancy was determined and if by service of notice when the notice wasduly served.

(6) Where the plaintiff claims payment of moneys secured by the charge,the affidavit must prove that the money is due and payable and give theparticulars mentioned in paragraph (3).

(7) Where the plaintiff ’s claim includes a claim for interest to judgment,the affidavit must state the amount of a day’s interest.

[10] The requirements under O 83 r 3(3) and r 3(7) are not necessary if thecourt is to be a mere rubber stamp for orders for sale. The court must besatisfied when it issues an order there would be a finality to the matterbetween the plaintiff and the defendant. Order 83 requires that where moneyor possession is claimed, the plaintiff must show by affidavit thecircumstances under which the right arose and show the amount of advance,

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amount of repayment, amount of instalments in arrears as at date ofsummons and date of affidavit, and amount remaining. Thus, whileapplications for orders for sale are in respect of ad rem rights, O 83 requiresthe in personam part of the actions to be dealt with also, for it would be clearinjustice if the ad rem rights were allowed when there is such error on the inpersonam part of the action that there was no foundation for an order forsale. In recognising that an order for sale is in respect of an ad rem right whilethe debt is an in personam right, the common error has been in viewing theproceeding before the court as being exclusively under s 256 of the NationalLand Code 1965 and overlooking the fact that the application, governedunder O 83, involves addressing the in personam claim also.

[11] Similarly in Islamic financing cases.

ISLAMIC BANKING AND FINANCING

[12] Islamic financing in Malaysia is governed by the Islamic Banking Act1983 and the Banking and Financial Institutions Act 1989 for banks licensedunder the respective legislation. The fundamental requirement under theseActs is contained in the provision that in respect of Islamic banking andfinancing, the aims and operations of the bank do not involve any elementnot approved by the religion of Islam.

[13] It is clear that Parliament does not intend that any financing facilitiesand schemes be passed off upon the public as Islamic when such facilities andschemes involve any element not approved by the religion of Islam. Thatprovision requires the civil court, therefore, to examine and make a findingof fact in the case before it, what element if any, is involved which is notapproved by the religion of Islam. In this regard, the civil court is not so muchconcerned with Islamic law perse, as with findings as to the elements of thereligion of Islam where they arise. The civil court is concerned with the factof those elements, and not the economic, social, religious and otherjustifications or rationale of the elements, for example, the prohibition andcondemnation of riba in the religion of Islam.

[14] It follows that if the civil court is not to be a rubber stamp to issueorders for sale, it must maintain curial supervision that the orders for sale arebeing sought upon balance sums that are not pursuant to any element notapproved by the religion of Islam.

RIBA AND USURY

[15] The primary element governing Islamic financing facilities is theQur’anic prohibition and condemnation of riba. On this, there is no disputeamong the different mazhabs.


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[16] The Tafsir Pimpinan ar-Rahman Kepada Pengertian al-Qur’an,a translation of the Al-Qur’an by Sheikh Abdullah Basmeih, edited andcertified by Sahibul Fadhilah Datuk Haji Muhammad Noor bin HajiIbrahim, and published by Islamic Affairs Division, Prime Minister’sDepartment, is the approved translation in Malaysia. It is therefore acceptedas authoritative. It provides the following translation into Bahasa Malaysia ofverses 275–280 of surah al-Baqarah in respect of the prohibition of riba:

275 Orang-orang yang memakan (mengambil) riba itu tidak dapat berdiri betulmelainkan seperti berdirinya orang yang dirasuk Syaitan dengan terhoyong-hayangkerana sentuhan (Syaitan) itu. Yang demikian ialah disebabkan mereka mengatakan:‘Bahawa sesungguhnya berjual beli itu sama sahaja seperti riba’. Padahal Allah telahmenghalalkan berjual beli (berniaga) dan mengharamkan riba. Oleh itu sesiapa yangtelah sampai kepadanya peringatan (larangan) dari Tuhannya lalu ia berhenti (darimengambil riba), maka apa yang telah diambilnya dahulu (sebelum pengharamanitu) adalah menjadi haknya, dan perkaranya terserahlah kepada Allah. Dan sesiapayang mengulangi lagi (perbuatan mengambil riba itu) maka mereka itulah ahlineraka, mereka kekal di dalamnya.

276 Allah susutkan (kebaikan harta yang dijalankan dengan mengambil) riba, dan lapula mengembangkan (berkat harta yang dikeluarkan) sedekah-sedekah dan zakatnya.Dan Allah tidak suka kepada tiap-tiap orang yang kekal terus dalam kekufuran, danselalu melakukan dosa.

277 Sesungguhnya orang-orang yang beriman dan beramal salih, dan mengerjakansembahyang serta memberikan zakat, mereka beroleh pahala di sisi Tuhan mereka, dantidak ada kebimbangan (dari berlakunya sesuatu yang tidak baik) terhadap mereka,dan mereka pula tidak akan berdukacita.

278 Wahai orang-orang yang beriman! Bertaqwalah kamu kepada Allah dantinggalkanlah (jangan menuntut lagi) saki baki riba (yang masih ada pada orang yangberhutang) itu, jika benar kamu orang orang yang beriman.

279 Oleh itu, kalau kamu tidak juga melakukan (perintah mengenai larangan ribaitu), maka ketahuilah kamu: akan adanya peperangan dari Allah dan RasulNya,(akibatnya kamu tidak menemui selamat). Dan jika kamu bertaubat, maka hakkamu (yang sebenarnya) ialah pokok asal harta kamu. (Dengan yang demikian) kamutidak berlaku zalim kepada sesiapa, dan kamu juga tidak dizalimi oleh sesiapa.

280 Dan jika orang yang berhutang itu sedang mengalami kesempitan hidup makaberilah tempoh sehingga ia lapang. Dan (sebaliknya) bahawa kamu sedekahkanhutang itu (kepadanya) adalah lebih baik untuk kamu, kalau kamu mengetahui(pahalanya yang besar yang kamu akan dapati kelak).

[17] Translations of the same verses of the Qur’an into English from otherrecognised sources are as follows:

Verse 275

YUSUF ALI: Those who devour usury will not stand except as stand one whomthe Evil one by his touch Hath driven to madness. That is because they say: ‘Tradeis like usury,’ but Allah hath permitted trade and forbidden usury. Those who after

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receiving direction from their Lord, desist, shall be pardoned for the past; their caseis for Allah (to judge); but those who repeat (the offence) are companions of theFire: They will abide therein (for ever).

PICKTHAL: Those who swallow usury cannot rise up save as he ariseth whom thedevil hath prostrated by (his) touch. That is because they say: Trade is just likeusury; whereas Allah permitteth trading and forbiddeth usury. He unto whom anadmonition from his Lord cometh, and (he) refraineth (in obedience thereto), heshall keep (the profits of ) that which is past, and his affair (henceforth) is withAllah. As for him who returneth (to usury) — Such are rightful owners of the Fire.They will abide therein.

SHAKIR: Those who swallow down usury cannot arise except as one whomShaitan has prostrated by (his) touch does rise. That is because they say, trading isonly like usury; and Allah has allowed trading and forbidden usury. Towhomsoever then the admonition has come from his Lord, then he desists, he shallhave what has already passed, and his affair is in the hands of Allah; and whoeverreturns (to it) — these are the inmates of the fire; they shall abide in it.

Verse 276

YUSUF ALI: Allah will deprive usury of all blessing, but will give increase fordeeds of charity: For He loveth not creatures ungrateful and wicked.

PICKTHAL: Allah hath blighted usury and made almsgiving fruitful. Allah lovethnot the impious and guilty.

SHAKIR: Allah does not bless usury, and He causes charitable deeds to prosper,and Allah does not love any ungrateful sinner.

Verse 277

YUSUF ALI: Those who believe, and do deeds of righteousness, and establishregular prayers and regular charity, will have their reward with their Lord: on themshall be no fear, nor shall they grieve.

PICKTHAL: Lo! those who believe and do good works and establish worship andpay the poor-due, their reward is with their Lord and there shall no fear come uponthem neither shall they grieve.

SHAKIR: Surely they who believe and do good deeds and keep up prayer and paythe poor-rate they shall have their reward from their Lord, and they shall have nofear, nor shall they grieve.

Verse 278

YUSUF ALI: O ye who believe! Fear Allah, and give up what remains of yourdemand for usury, if ye are indeed believers.

PICKTHAL: O ye who believe! Observe your duty to Allah, and give up whatremaineth (due to you) from usury, if ye are (in truth) believers.

SHAKIR: O you who believe! Be careful of (your duty to) Allah and relinquishwhat remains (due) from usury, if you are believers.


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Verse 279

PICKTHAL: And if ye do not, then be warned of war (against you) from Allah andHis messenger. And if ye repent, then ye have your principal (without interest).Wrong not, and ye shall not be wronged.

SHAKIR: But if you do (it) not, then be apprised of war from Allah and HisMessenger; and if you repent, then you shall have your capital; neither shall youmake (the debtor) suffer loss, nor shall you be made to suffer loss.

Verse 280

YUSUF ALI: If the debtor is in a difficulty, grant him time Till it is easy for himto repay. But if ye remit it by way of charity, that is best for you if ye only knew.

PICKTHAL: And if the debtor is in straitened circumstances, then (let there be)postponement to (the time of ) ease; and that ye remit the debt as almsgiving wouldbe better for you if ye did but know.

SHAKIR: And if (the debtor) is in straitness, then let there be postponement until(he is in) ease; and that you remit (it) as alms Is better for you, if you knew.

[18] The court observes that there is nothing that prohibits giving of aloan. It is only the ‘riba’ element in a loan that is prohibited and condemned.Even so, it is the lender who stands condemned as to the riba. Hence,borrowers who have to pay riba are victims. Hence also, loans without riba,such as benevolent loans (qard al-hasan) are allowed. The prohibition istherefore not as to the giving of loans, or for that matter, loans incorporatingriba, but riba itself.

[19] This ‘riba’ as referred to in the Qur’an is the same ‘usury’ in Judaismand Christianity because verse 161 of surah an-Nisaa explicitly mentions thatriba was prohibited for the Jews also.

[20] The following excerpts may be read with advantage as to theprohibition of usury in Judaism and Christianity:

Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals,usury of anything that is lent upon usury. [Deuteronomy 23:19]

If you lend money to My people, to the poor among you, you are not to act as acreditor to him; you shall not charge him interest. [Exodus 22:25]

He who oppresses the poor taunts his Maker, But he who is gracious to the needyhonors Him. [Proverbs 14:31]

He that by usury and unjust gain increaseth his substance, he shall gather it for himthat will pity the poor. [Proverbs 28:8]

Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He thatwalketh uprightly, and worketh righteousness and speaketh the truth in his heart.

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He that putteth not out of his money to usury, nor taketh reward against theinnocent. [Psalms 15:1,2,5]

Then I consulted with myself, and I rebuked the nobles, and rulers and said untothem, Ye exact usury, every one of his brother. And I sat a great assembly againstthem. [Nehemiah 5:7]

He that hath not given forth upon usury, neither hath taken any increase, that hathwithdrawn his hand from iniquity, hath executed true judgment between mah andman, hath walked in my statues, and hath kept my judgments, to deal truly; he isjust. He shall surely live, said the Lord God. [Ezekiel 18:8.9]

In thee have they taken gifts to shed blood; thou hast taken Usury and increase,and though hast greedily gained of thy neighbors by extortion, and hast forgottenme, said the Lord God. [Ezekiel 22:12]

USURY: COMMON LAW AND EQUITY

[21] Usury is synonymous with lending that takes advantage of borrowers.Usury was condemned because the terms of the loans were, for lack of a betterterm, usurious in nature. Study of the history of common law and thedevelopment of the courts of equity show that it took the development ofequitable principles in the Chancery Court, such as the equity of redemptionand of equitable trust to remove the hardships and injustices resulting fromthe operation of common law that parties are bound by the terms of theiragreement, when terms of agreement were usurious or oppressive. Theequitable principles developed in the Chancery Court are amongst thefoundation stones in the law and practice of modern conventional loans,whether with fixed or variable interest.

[22] It must be observed that hardships from usury occur only whenborrowers breached the terms of their loans, resulting in the loss of theproperty mortgaged as security as well as the payments they had made. In theevent no breach occurred, both lender and borrower could have had nocomplaints. Thus the prohibition and condemnation of usury arose from thehardships, arising from usurious terms, suffered by those who were unable tomeet their obligations under their loan agreements.

[23] No study appear to have been undertaken as to the terms of loansmade in Islamic areas that are prohibited as riba, let alone a comparativestudy of terms of loans with riba amongst the Arabs with usurious loansamongst Jews and Europeans and with modern conventional terms have beenundertaken although it would have assisted for a better understanding ofwhat is riba. The court did not find any such specific study. The more


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effortless view was taken, it seems, that it is the interest upon the loan thatis riba, and since riba is prohibited, therefore interest is prohibited.

[24] The application of the notion that it is the interest in a loan that is ribato the verses quoted above in the surah al-Baqarah results in theinterpretation that a profit upon a sale is allowed, but interest upon a loan isprohibited in the religion of Islam. But since both profit and interest increase,maintenance of the distinction between a sale and a loan is therefore essential.On a first glance it can be observed that the profit on a sale is upon the goodssold, while the profit upon a loan is for the time the borrower is allowed theuse of the lender’s money.

OTHER ELEMENTS

[25] In considering whether the distinction between a sale and a loan ismaintained, it must also be borne in mind that there is another basic elementin the religion of Islam. It is that Allah is Omniscient. On that element ofomniscience rests the belief of the faithful in the certainty and inevitability ofAllah’s justice. That belief is the persuasive force for the faithful to performtheir obligatory duties, as well as their assurance of the certainty of theirreward for compliance.

[26] This element arises for inclusion in the consideration because theprohibition and condemnation of riba in the surah al-Baqarah is, accordingto the religion of Islam, by Allah, who will pass His judgment. Whether thecourt is a Syariah Court or not, that Allah is Omniscient must also beassumed where that court is required, in this case by law, to take cognisanceof elements in the religion of Islam.

FORM AND SUBSTANCE

[27] Regardless whether a person is a follower of the religion of Islam ornot, the logic remains true that if a god is omniscient, that god knows thetruth of what is done and intended, regardless of the terminology or languageused. The effect of the assumption of omniscience is therefore that legaldevices or trickery (hila) would fail in the eyes of Allah. Transactional schemesthat purport to be Islamic must be viewed as a whole rather than, by closingone eye in succession, to view the agreements in the transaction as separatecomponents, so that the transactions are seen for what they are, beforeforming an opinion on permissibility. It has been said with obviousjustification, that what matters in discerning the true nature of contracts andtransactions is the substance and not the words and structure.

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[28] It is helpful to recall the words of Salleh Abbas LP, writing thejudgment of the Supreme Court comprising of Wan Suleiman, George Seah,Hashim Yeop A Sani and Syed Agil Barakbah SCJJ, and quoting fromS Abdul A’la Maududi, The Islamic Law and Constitution (7th Ed) March1980 in Che Omar bin Che Soh v Public Prosecutor [1988] 2 MLJ 55:

There can be no doubt that Islam is not just a mere collection of dogmas andrituals but it is a complete way of life covering all fields of human activities, maythey be private or public, legal, political, economic, social, cultural, moral orjudicial. This way of ordering the life with all the precepts and moral standards isbased on divine guidance through his prophets and the last of such guidance is theQuran and the last messenger is Mohammad SAW, whose conduct and utterancesare revered.

[29] In developing a Fiqh al-Muamalat, caution must therefore be exercisedfor it is all too easy, when creating and then relying on legal fiction, to fall intothe pit of complacency and inadvertently developing a fiqh al-hiyaf. Bearingthis in mind it is not sufficient that the distinction between a sale and a loanis maintained in form, but it must also be maintained in substance. It is thereality and not the form and labels that matter.

CONCEPT AND IMPLEMENTATION

[30] There is no dispute that the concepts of Al-Bai’ Bithaman Ajil,Al-Istisna’a, Bai Al-Inah, Murabahah, Al-Ijarah and the like are, in principle,Islamic in nature since no interest is involved. There are thus no issuesinvolving elements not approved by the religion of Islam inherent in theseconcepts. The starting point of consideration by the court is therefore thatthese purportedly Islamic financing schemes, approved by the SyariahAdvisory Council under the Central Bank of Malaysia Act 1958 (Revised1994) Act 519, in principle do not involve any element not approved by thereligion of Islam. There is neither necessity nor reason to refer these conceptsto the Syariah Advisory Council for any ruling, which in any case, while theyare to be taken into consideration, are not binding upon the court.

[31] The function of this court is to examine the application of theseIslamic concepts, as to whether as implemented, and in the particular casesbefore it, the transactions do not involve any element not approved in thereligion of Islam. It is a question of looking at the particular facts. Thatremains the judicial function of the court which it cannot abdicate.

[32] The above form the foundation of this court’s approach in respect ofthe actions involving Islamic financing facilities before it. Since the Islamic


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financing schemes now before the court revolve around a sale transaction itis appropriate to commence with the Al-Bai’ Bithaman Ajil.

EARLIER DECISIONS

[33] In the first reported decision, Bank Islam Malaysia Bhd v Adnan binOmar [1994] 3 CLJ 735; [1994] 3 AMR 44, the High Court held that thedefendant was bound on the grounds he knew the terms and had knowinglyentered into the agreement.

[34] The above case is relied upon by the plaintiff banks for the propositionthat the High Court does not look into the issue whether the Al-Bai’Bithaman Ajil transaction involves an element not approved by the religionof Islam or not.

[35] In Bank Islam Malaysia Bhd v Adnan bin Omar a facility amount ofRM583,000 had been granted to the defendant by the plaintiff. This wassecured by a charge of the land in question by the defendant to the plaintiff.The facility amount was granted under the Islamic concept of Bai-BithamanAjil which, as practised by the Islamic Bank, involved three simultaneoustransactions, which in that case were:

(i) On 2 March 1984 the defendant sold to the plaintiff a piece of land forRM265,000 which sum was duly paid to him;

(ii) On the same date, the plaintiff resold the same piece of land to thedefendant for RM583,000 which amount was to be paid by thedefendant in 180 monthly instalments;

(iii) Also on the same date, the said land was charged to the plaintiff by thedefendant as security for the debt of RM583,000. The High Court heldthat the defendant was bound to his agreement to pay RM583,000.

[36] The consequence was that the defendant who sought and obtained anIslamic financing facility of RM265,000 ended up, when he defaulted notlong after, with liability of RM583,000. The claim for the total of allinstallment payments not yet due to be brought forward as due and payableupon termination and declaration by the bank of a default, involved aninterpretation of ‘selling price’ that resulted in the defendant being liable toan amount far higher than he would have been liable to in a conventionalloan with interest.

[37] If repetition of this may be forgiven, it is self evident that if aconventional loan must be avoided because of the prohibition of ‘riba’ orinterest, surely the alternative must result in a consequence that is less

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burdensome than a default in the conventional loan with prohibited interest.But it is equally evident in this case that the result of what is presented as theapplication of the Qur’anic principle is that the defendant became liable,upon default at any time, to an amount that is 2.2 times the facility heobtained. It could hardly have been intended by the terse words in the surahal-Baqarah that an Islamic financing facility should result in consequences farmore onerous than the conventional loan with ‘riba’ that is prohibited andunequivocally condemned.

[38] One might pause and observe that the harshness of usury is hardestupon those who default, and much less so, if at all, upon those fortunateenough to be able to service the loan successfully. The Qur’an could hardlyhave intended that its followers, faithfully and trustingly seeking an Islamiccompliant facility, should be delivered to those who offer what appear to beperfectly Islamic compliant facilities, but upon a default, had aninterpretation applied that imposes a far more onerous liability than theconventional loan with interest. It is difficult to conceive that the religion ofIslam intended to discourage its followers from the conventional loan withinterest, condemn lenders for such loans, and deliver its followers into thehands of banks and financiers who under sale agreements with deferredpayments, exact upon default, payments far exceeding the liability upondefault of a conventional loan with interest. One cannot say that the religionof Islam is so much more concerned with form than substance as wouldsustain the bank’s interpretation of ‘selling price’.

[39] In Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67 theplaintiff bank relied upon the approach in Bank Islam Malaysia Bhd v Adnanbin Omar.

[40] No doubt if the defendant in Affin Bank Bhd v Zulkifli bin Abdullahhad been able to perform upon his obligations under the terms of the facility,there was no question of any element not approved by the religion of Islam.But in seeking an amount far higher than the liability in a conventional loan,it raised the question whether the bank’s interpretation of ‘selling price’involved any element not approved by the religion of Islam.

EQUITABLE INTERPRETATION

[41] Startled that an original facility of RM346,000, became after arevision and after a default, in liability sought by the bank in the sum ofRM992,363.40, the court in Affin Bank Bhd v Zulkifli bin Abdullah orderedthe matter to a trial where testimony was heard to enable the court tounderstand how such sum came about. It transpired that the facilityoriginally RM346,000 was revised after the defendant left the employ of the


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plaintiff to the new amount of RM992,363.40. Termed as the ‘bank’s sellingprice’, it was arrived at by taking the facility extended and, applying andadding thereon the bank’s profit margin rate and the length of time sought forthe payment of the bank’s selling price.

[42] The plaintiff bank relied upon the approach in Bank Islam MalaysiaBhd v Adnan bin Omar. It was the classic common law approach that sincethe defendant had agreed and signed, the defendant was bound. There was noquestion that the defendant was bound to his contract but the true questionwas what was he bound to as the ‘selling price’.

[43] It was evident the selling price under the bank’s interpretation was theoriginal facility amount extended, to which the bank’s profit margin rate andthe length of time payment of installments was applied. Although the sellingprice calculation appeared similar to loan with interest calculation, that factof similarity alone of course does not make the transaction into a loan. Thefact the calculation looked like an interest based loan calculation was nottaken against the bank. No finding of loan was made. Accepting that theAl-Bai’ Bithaman Ajil transaction, after a novation, in that case was a sale bythe plaintiff to the defendant, it was obvious that it was only the bank’sinterpretation of the ‘selling price’ that resulted in the startling liability uponthe defendant.

[44] An equitable interpretation of the bank’s selling price term is that,from the evidence, it was in fact a formula that determined the bank’s sellingprice from the original facility amount to which was applied the bank’s profitmargin rate as derived from the terms of the agreement between the parties,but applied as at the time the facility is paid off, meaning that the parties hadagreed to a selling price upon a formula which produced the sum to be paidat the time the facility is paid off and the total sum in the agreement onlyrepresented the selling price if the full term is utilised. The equitableinterpretation took away the harsh result inherent under the plaintiffsinterpretation and reduced the facility to being no worse but even so, still nobetter, than the liability under a conventional loan.

[45] Much reliance have been placed upon Bank Islam Malaysia Bhd vAdnan bin Omar by the plaintiffs for their interpretation of sale. Such relianceoverlook finding by the court in Bank Islam Malaysia Bhd v Adnan bin Omaritself that what was granted was a loan, excepting one reference to there beingno question of interest because of the Islamic nature of the loan:

It was a term of the charge document that in the event of any default in thepayment of the loan installments by the defendant, the plaintiff would be entitled

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to sell the charged land. The defendant had defaulted in his installment paymentssince April 1985.

(i) the amount of RM583,000 which was stated as a loan in the charge documentwas never received by him as a loan; it was just a facility amount and he onlyreceived RM265,000.

It is relevant to note that all the aforementioned transactions between the partieswere above board and made with the full knowledge of the defendant. He knewthat the entire exercise was to implement the grant of a loan to him by the bank,the repayment of that loan inclusive of a profit margin by him, and the charge ofhis land as security for the loan. This was done by way of a couple of landtransactions in order to bring the loan transaction within the limits of Islamic Law.His knowledge of this is evidenced by his acceptance of the letter of offercontaining all the above terms.

In view of the circumstances of the loan I am persuaded to accept the plaintiff ’sstatement of the amount of advance under O 83 r 3(3)(a) as being RM583,000.In my view this is in accord with the intention of the parties and the defendantcannot now dispute the amount.

A reading of O 83 r 3(3)(c) in the context of the purpose of the whole order canlead to only one reasonable interpretation; And that is that there must be anamount of interest or an amount of installment in arrears at the given date, but notnecessarily both. The crucial precondition is the fact of default of payment ofwhatever amount. The intention is to show a calculation of such amount whetherit be one of interest, of installment or both. In the present case there is no questionof there being any interest because of the Islamic nature of the loan. Thedefendant’s default is in respect of the installment payments and this has been dulyparticularised by the plaintiff. I am, as such, satisfied that there has beencompliance of the said provision ...

The defendant averred that the statement of balance due was not the correctamount because the maturity date for the loan is 2 March 1999 and any paymentwhich he makes now would entitle him to rebate in the total sum owed on accountof early recovery, as stated in the plaintiffs affidavit of 9 March 1991. However, asexplained by the plaintiff, the relevant agreements give the defendant no right torebate. This rebate or ‘muqassah’ is practised by the plaintiff on a discretionarybasis. In any event, there was no question of early repayment as the loan was nota term loan and the defendant’s failure to pay the installments was a breach of theagreement which has invoked the plaintiffs right to terminate the facility anddemand for immediate full repayment of the loan.

[46] Plainly if it was a loan, there is no question of earning a profit upona loan without involving an element not approved by the religion of Islam.An appeal by the defendant was dismissed by the Federal Court, but there isno published judgment. In the circumstances, Bank Islam Malaysia Bhd vAdnan bin Omar must be seen as a decision on the basis of its own facts andthe submissions raised thereat.


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[47] In Affin Bank Bhd v Zulkifli bin Abdullah the court rejected the bank’sinterpretation of what was the ‘selling price’, and applied the equitableinterpretation of the term.

SELLING PRICE CALCULATION

[48] Although the equitable interpretation applied in Affin Bank Bhd vZulkifli bin Abdullah meant that the sum as the calculated selling price iscalculated for the date when the facility was to be paid off, the issue of ‘gharar’does not arise since to derive the bank’s profit margin rate from the agreementbetween the parties required little arithmetic, and the selling price as on thedate the loan is paid off can be calculated with certainty. The Bank NegaraMalaysia website offers the following in respect of Al-Bai’ Bithaman Ajilhouse financing:

(1) What is Al-Bai’ Bithaman Ajil (BBA) house financing?

BBA House Financing is an Islamic house financing facility, which is basedon the Syari’ah concept of Al-Bai’ Bithaman Ajil (BBA). BBA is a contractof deferred payment sale ie the sale of goods on deferred payment basis at anagreed selling price, which includes a profit margin agreed by both parties.Profits in this context is justified since it is derived from the buying andselling transaction as opposed to interests accruing from the principal lentout.

(2) What are the main characteristics of a BBA house financing?

All the components to determine the selling price has to be fixedbecause the selling price has to be fixed at the time the contract ismade. Hence, the profit rate for BBA financing is fixed throughout theperiod of financing.

(3) What are the mechanics of the BBA house financing?

(a) Customer identifies the asset to be purchased.

(b) Bank determines the requirements of the customer, in relationto the financing period and nature of repayment.

(c) Bank purchases the assets concerned.

(d) Bank subsequently sells the relevant asset/property to thecustomer at an agreed price, which consists of:

• Actual cost of the asset to the bank i.e. financing amount.

• Bank’s profit margin

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(e) Customer is to settle the payment by instalment paymentthrough out the financing period/period.

(4) What are the difference between BBA house financing and anordinary conventional housing loan?

An ordinary conventional housing loan is given oil the basis ofdebtor/creditor relationship. Whereby, the amount of loan is beingcharged interest, normally quoted at a certain percentage above baselending rate over loan period, repayable in periodic instalment. Thebase lending rate will fluctuate up or down and it will affect the totalloan cost. Simultaneously, arrears in conventional loans are normallycapitalised.

However, under the Islamic Banking Scheme, since BBA concept isbeing applied, a seller buyer relationship will be established and theselling price is fixed upfront. The sales price is then repaid in periodicinstalment and the agreed instalment will remain fixed throughout thefinancing period. As such, customer’s interest rate risk is eliminated.Furthermore, arrears will not be capitalised.

(5) Will my monthly instalments change according to the base lendingrate?

The BBA Financing scheme is not tagged to the base lending rate.Thus, the instalments will be fixed according to the rates declared uponagreement.

(6) Is it possible to compute the selling price?

Yes, the selling price is computed as per the formula;

selling price = (Monthly Instalment x Number of Financing Months)+ Grace Period Profit (if any).

Notes:

• Monthly instalment is computed using the agreed profit rateon a Constant Rate of Return and monthly rest.

• Grace Period Profit is charged when Bank is financingproperty under construction. As such, during theconstruction period, customer will pay the grace period profitonly.

Example:

Financing Amount: RM 100,000

Profit rate: 8%

Financing Period: 20 Years


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Instalment per month: RM837

selling price — (RM837 x (20 x 12)) + 0 -RM200,880

(7) Is early settlement allowed under the BBA financing facility?

Yes. In addition, customer is not required to give advance notice to thebank for the early settlement ie financing is settled before thecompletion of the financing tenor. As such, there is no early settlementpenalty fees/charges imposed on customer.

(8) Does the customer entitled for rebate (Ibra’) in case of earlysettlement?

Yes, customer will be entitled for a rebate on the concept of Ibra’ for theunearned profit at the Bank’s discretion.

The rebate is in the form of a reduction in the balance outstanding. Theearly settlement amount is the net figure after deducting the rebate.

(9) What is the period of financing for BBA house financing?

Normally for house or residential property financing, the maximumrepayment period is 30 years or at the age of 65 whichever is earlier. Itmight differ from one bank to another.

(10) What is the margin of financing for BBA house financing?

The margin of financing differs from one bank to another. Generally, themargin ranges from 70% to 100% against the Sales & PurchaseAgreement value or the current market value. Again, customer’srepayment capacity will also affect the margin of financing that bank canoffer.

(11) Is there security/collateral requirement under BBA house financing?

Yes, the property financed by the bank will be used security/collateral forthe financing facility under the BBA house financing. The property isusually secured by way of first party charge.

(12) What are the legal documents for the BBA house financing?

(a) Letter of Offer

(b) Property Sale Agreement

(c) Property Purchase Agreement

(d) Legal Charge, or

(e) Assignment and Power of Attorney

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(f ) Or any other Islamic financing documents that is required for thehouse financing.

[49] The above shows how the selling price can be calculated. Thatsomeone does not have the skill to do so but needs another to help himimplies no uncertainty. That the date the selling price is paid off was notpredetermined is no more uncertain than the uncertainty as to when a defaultmight occur and if the bank would terminate and demand immediatepayment of the balance of the selling price. The objection therefore carries nological merit whatsoever.

[50] No disrespect is intended if I do not discuss other decisions includingDato’ Hj Nik Mahmud b Daud v Bank Islam Malaysia Bhd [1998] 3 MLJ 393;Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355;Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249; MalayanBanking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389.

IBRA OR MUGASSAH

[51] Another suggestion is that ibra (or muqassah) can be given in theevent of early repayment. However, the essence of ibra is that it is a rebate atthe discretion of the plaintiff. It does not answer the issue before this courtwhich concern only the correct interpretation of the agreed purchase priceunder an Al-Bai’ Bithaman Ajil contract.

AL-BAI’ BITHAMAN AJIL

[52] The term ‘Al-Bai’ Bithaman Ajil’ is no more than a sale (the ‘bai’) anddeferred payment of the price (the ‘bithaman ajil’) as agreed to beten theparties. In the light of the prohibition and condemnation of riba, andapproval of increase or profit upon a sale, it is necessary to examine moreclosely the concept of increase, profit and interest.

[53] If interest is no more than an increase, expressed as a sum or rate, forthe facility of a loan, profit upon a sale is the increase upon the sale. The sumof the seller’s cost and his profit is the selling price. The selling price isordinarily paid upon delivery. If the payment is to be made later, the seller ineffect is extending a credit, in other words, a loan, of that selling price. If thereis no increase of the selling price as a consequence of granting time to makepayment, it is a benevolent loan (qard al-hasan).

[54] If the payment is to be made later, it may be argued that the carryingcost the seller incurs can be a legitimate cost if identified and agreed as such.


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This was assumed in Affin Bank v Zufkifli bin Abdullah and other Al-Bai’Bithaman Ajil cases. This is so even if that carrying cost includes interest thatthe seller has to pay a third party. This is because the prohibition andcondemnation of riba is only against the lender and not the borrower, evenif the borrower in respect of interest in the carrying cost is the bank itself.

[55] In the contracts there is the provision of ta’wid, being compensationfor delayed payment of the amount due. In the light of the approval by theCentral Bank of Malaysia and absence of specific submissions that it carriesan element contrary to the religion of Islam, the court will allow the order.

[56] But it must be said that, bearing in mind that deferred payment of theselling price is a credit or a loan, permissible only because no riba is charged,any profit claimed or charged by the seller from deferred payment by addingto the cost above a profit for himself for the time given to make full payment,that profit arising from the giving of time to make payment is interest, is ribaand the very element prohibited in the religion of Islam.

BONA FIDE

[57] In employing the ‘Al-Bai’ Bithaman Ajil’ concept in a bank’s Al-Bai’Bithaman Ajil scheme, care must be taken to keep the transaction as a bonafide sale. It is too easy to structure a loan as a joint venture or a sale, and itis always only too human to be tempted and to succumb to such structuringin order to make profit. Hence in the past, as in Affin Bank v Zulkifli binAbdullah, there was a conscious effort to make the transaction into a formalsale by the bank. See also BI Credit & Leasing Bhd v Loo Wah Hee & Anor[2002] 1 LNS 114. A novation agreement was required for the client torelinquish his contract with the vendor. The bank took over all obligations ofthe purchase from the vendor. Then the bank as the owner proceeded to sellto its customer. Even so such arrangements came under criticism as meresleight of hand in the face of the omniscient and the initial steps to distortionand doom in the quest for profit.

[58] Furthermore, the key to the argument that the Al-Bai’ Bithaman Ajilscheme does not involve any element not approved by the religion of Islamis to read the property sale agreement (‘PSA’) independently. This is acceptedin mazhab Syafi’e, but not by the other recognised mazhabs. It is not thefunction of the civil court to decide or rule whether mazhab Syafi’e or theother mazhabs are right. The learned Dato’ Sheikh Ghazali Haji AbdulRahman (the then Syariah Chief Justice of Malaysia) wrote in his foreword inthe publication Resolutions of the Securities Commission Syariah AdvisoryCouncil:

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It cannot be denied that there may be a few SAC resolutions that differ from theopinion of Syariah experts in other countries. These differences exist due to thedifference in time and place, and also differences in needs and background of acountry. If we should go back to the ancient times of Islamic communities, suchvaried opinions with regard to certain principles are not uncommon. Even ImamSyafi’e, founder of the Syafi’e school of thought (mazhab), occasionally had twodiffering opinion on the same issue due to differences in context, background, timeand place of occurrence.

Indeed, these differences in opinions should be seen as a beauty and a blessing forMuslims because, whether consciously or not, they provide a way out for everyproblem and satisfy the needs of Muslim communities of different geographicalarid cultural backgrounds. What is needed is that we respect any opinion offeredso long as it is based on Syariah arguments.

[59] There is much in the religious approach that is to be respected,particularly in seeking common ground between the mazhabs. But while it istrue to say that there are these differences in the religion of Islam, therequirement under the Islamic Banking Act 1983 and Banking and FinancialInstitutions Act 1989 that the financing facilities offered do ‘not involve anyelement not approved by the religion of Islam’ means that unless thefinancing facility is plainly stated to be offered as specific to a particularmazhab, then the fact it is offered generally to all Muslims means that it mustnot contain any element not approved by any of the recognised mazhabs.

TRANSACTION VERSUS AGREEMENT

[60] The submissions advanced for the plaintiffs and reliance upon BankIslam Malaysia Bhd v Adnan bin Omar suggest also that since the parties haveagreed upon a selling price, there is ‘aqad’ and the court must look no further.This view does not appear to be right. The fact there is an ‘aqad’ and beforethat an ‘ijab’ and ‘qabul’ does not prevent an examination of the terms as tothe transaction in fact is. In Malayan Banking Bhd v PK Rajamani [1994] 2CLJ 25 SC the appellant admitted it had granted the borrower a new facilityunder which the new interest rate was no longer 9% as in the previousfacilities but 10%. The question before the Supreme Court on appeal waswhether it was indeed a new facility as stated. The Supreme Court held:

It may also be true that the appellant had admitted that it had granted to theborrower a new facility of RM60,000 subject to its terms and conditionsmentioned therein. We also do not dispute that the prescribed rate of interest is10% pa, and therefore different from the first and second facilities of 9% pa.However it does not necessarily follow from these facts that the said letter createsa new facility. In our view, the correct approach would be to look at the substance,not just the label which had been attached to the letter. The law will always lookbeyond the terminology of the document to the actual facts of the situation and


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it is no longer a question of words but substance (see Woo Yew v Yonq Yang Hoo andAddiscombe Garden Estates Ltd v Crabbe)

[61] This Woo Yew v Yona Yong Hoo is the case of Woo Yew v Yona Yong Hoo[1978] 1 LNS 240 FC where Raja Azlan Shah Ag CJ (Malaya), as HisMajesty then was, had held:

I now turn to the crux of the matter: was the transaction a licence or a tenancy?What is the test to be applied? It is now well known that the law will always lookbeyond the terminology of the agreement to the actual facts of the situation seeAddiscombe Garden Estates Ltd v Crabbe [1958] 1 QB 513. The reason is becauseof the number of sham agreements purporting to create no more than merelicences which are designed to circumvent the protective provisions of the Controlof Rent Act.

[62] The court has authority therefore, where warranted, as in aconsideration of whether there are any elements that are not approved by thereligion of Islam, to look beyond the words of agreement to the actual factsof the case in order to determine the substance of the transaction between theplaintiffs and the defendants before it draws any conclusions on the nature ofthe Al-Bai’ Bithaman Ajil transactions. It is necessary to look beyond thelabels used and look at the substance particularly in light of the fact that theinterpretation advanced by the plaintiffs result in the defendants beingburdened with a debt far in excess of that if they had taken an interest basedconventional loan, a result which on the face of it contradicts the intent andpurpose of the Qur’an to banish the burden of riba in riba-burdened loans.To refuse to do so and to look exclusively to the PA would only be a refusalto acknowledge reality or facts before the court.

[63] The device of a set of contracts is reminiscent of the practice ofbankers and merchants in the middle ages across territories of Judaism andChristendom who circumvented laws against usury by entering into a set ofcontracts (contractum trinius). Their scheme was even more obtuse than in theAl-Bai’ Bithaman Ajil cases before this court. They entered into a set ofcontracts comprising an investment by the banker in the merchant’s businessscheme, a sale of the banker’s rights to profit in the merchant’s businessscheme in return for specific payments, and a contract of guarantee whichprovided the security. In sum it had the effect of reproducing the effect of aninterest bearing loan with security, but each contract read independently werenot illegal as usury. It would be appalling to make it that the religion of Islamgives recognition to such practice to circumvent the surah al-Baqarah.

[64] In the Al-Bai’ Bithaman Ajil cases now before the court, thedefendants had already purchased the property from a third party, and had

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paid for part of the price. Approaching the respective plaintiff for a facility tocomplete their purchase, the respective defendant was required to sell theproperty he had bought to the respective plaintiff for that balance sum undera bank’s property purchase agreement (PPA). The respective plaintiff thensold the property to the respective defendant under a bank’s property saleagreement (PSA), wherein the respective defendant agreed to pay an agreednumber of monthly instalments of specific sums. As security he was requiredto execute a charge or an assignment of the property to the plaintiff. The totalof the agreed instalments add up to the bank’s ‘selling price’. No more is thevendor of the property involved, except to receive the balance of his sellingprice to the respective defendants. The effort to purchase directly from theoriginal vendor and then to sell to the bank’s customer has been abandoned.More so than ever before the transaction between the plaintiff bank and itsdefendant customer became transparently 50 financing in nature and forprofit when the Al-Bai’ Bithaman transaction comprising letter of offer, PPA,PSA and the charge or assignment are read together.

[65] If the Al-Bai’ Bithaman Ajil transactions of the past were said tomaintain only a pretence of a sale transaction between the bank and thecustomer, the Al-Bai’ Bithaman Ajil in the current cases abandoned allpretence. It usually happens when pretence is resorted to, that in time, whenthe reason for the pretence is lost in the interstices of time, the pretence isabandoned. That, however, neither justifies nor corrects the problem that itmust not be a pretence in the first place, but that the novation was what itwas intended to be, to make the bank a genuine seller.

[66] To summarise, it is essential to maintain a bona fide sale in order thatthe profit should not be an element not approved by the religion of Islam.Even so, an interpretation of the selling price must not be such as to imposea heavier burden than on a loan with interest for that would obviously becontrary to the intent and purpose of surah al-Baqarah. The correctinterpretation would be that which is not worse if not better than inconventional loan with riba. If effort to maintain a bona fide sale isabandoned, deferred payment of sale price is effectively a credit or loanextended and any profit would be prohibited as riba.

SUMMARY, CONCLUSION AND ORDERS

[67] To summarise, this court holds that neither the Federal Constitutionnor the Islamic Banking Act 1983 and the Banking and Financial InstitutionsAct 1989, in using the terms ‘Islam’ and ‘religion of Islam’, provide as to theinterpretation of which mazhab of Islam is to prevail. The Al-Bai’ BithamanAjil facilities are offered as Islamic to all Muslims, and not exclusively tofollowers of any particular mazhab. It follows, therefore, that the test is that


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there must be no element involved that is not approved by the religion ofIslam under the interpretation of any of the recognised mazhabs. Thus, thefact that the reading of the PPA and the PSA independently is not acceptedunder other mazhabs even though accepted under mazhab Syafi’e means thatthe PPA and PSA cannot be read independently for the purposes of theIslamic Banking Act 1983 and the Banking and Financial Institutions Act1989. This is consistent with the foundation element in the religion of Islamof the omniscience of Allah.

[68] This court accepts that where the bank is the owner or had become theowner under a novation agreement, the sale to the customer is a bona fidesale, and the selling price is as interpreted in Affin Bank Bhd v Zulkifli binAbdullah. Thus, where the bank was the owner of the property, by a directpurchase from the vendor or by a novation from its customer, and then soldthe property to the customer, the plaintiffs’ interpretation of the bank’s sellingprice is rejected and the court applies the equitable interpretation.

[69] This court holds that where the bank purchased directly from itscustomer and sold back to the customer with deferred payment at a higherprice in total, the sale is not a bona fide sale, but a financing transaction, andthe profit portion of such Al-Bai’ Bithaman Ajil facility rendered the facilitycontrary to the Islamic Banking Act 1983 or the Banking and FinancialInstitutions Act 1989 as the case may be.

[70] Acting upon the basis that the bank’s action resulted more likely froma misapprehension rather than of intent aforethought, the court holds theplaintiffs are entitled under s 66 of the Contracts Act 1950 to return of theoriginal facility amount they had extended.

[71] Notwithstanding that the properties may, where no title had beenissued, have been assigned absolutely to the plaintiffs, by virtue of the fact theassignment was as security, it is equitable that the plaintiffs must seek toobtain a price as close to, if not more than, the market price as possible, andaccount for the proceeds to the respective defendants.

[72] Where the above ruling disposes of the matter, the court orders thatcounsels for the plaintiffs and defendants do draft their orders for approvalaccordingly as appropriate:

(a) that order for sale by public auction is granted in respect of the chargedproperties for the recovery of the balance of purchase price upon thesum due as purchase price on the date of settlement, including ta’widif any;

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(b) that auction date shall be held on a date four months from the date ofthis judgment;

(c) that the reserved price, being a price equivalent to the market price,shall be fixed by the deputy registrar;

(d) other orders in respect of auction as provided by s 257(1) of theNational Land Code;

(e) costs to be taxed and paid by the defendants; and

(f ) liberty to apply.

[73] Where the ruling above does not dispose of the matter but that thereare other issues, parties are to proceed with the usual directions for casemanagement and appear for case management on 29 October 2008.

Court ordered sale by public auction of the charged properties with costs to betaxed.

Reported by K Nesan


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arab-malaysian finance bhd v taman ihsan jaya sdn bhd & ors

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